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In Short
- Decide between unincorporated (sole traders, partnerships) and incorporated (limited companies, LLPs) structures.
- Unincorporated businesses make you personally liable for debts, while incorporated ones protect personal assets.
- Consider tax, liability and administrative factors based on your long-term goals.
Tips for Businesses
Selecting the right structure for your startup is crucial. Unincorporated options carry personal liability, while incorporated options offer protection but require more administration. Make the decision based on your business needs and risk tolerance.
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When choosing a company structure for your startup, you should consider the advantages and disadvantages of each structure. Several factors are critical in determining your startup structure. For example, you should consider:
- costs;
- the complexity of processes;
- protection of assets;
- tax; and
- liability.
In this article, wewill help you decide the right business structure by explaining:
- the distinction between incorporated and unincorporated business structures;
- the four main types of business structures; and
- the advantages and disadvantages of each.
Unincorporated vs Incorporated Structures
The most basic distinction between different business structures isthe difference betweenincorporated and unincorporatedbusinesses. The two unincorporated business structures we will look at are:
- sole traders; and
- partnerships.
The two incorporated business structures we will look at are:
- private companies limited by shares; and
- limited liability partnerships.
Unincorporated Businesses Structures
A critical legal distinction you should note regarding an unincorporated business is that it does not have a separate legal existence from its owners. The law considers your business assets and liabilities the same as your personal assets and liabilities. If your business incurs a liability that it cannot repay, your creditors can come after your personal assets, like your house and other possessions. Even with insurance, your policy may not extend to this situation.
Sole Traders
This is the most common kind of unincorporated business in the UK, with more than 3.1 million active sole traders. You could be selling luxury watches, cutting hair, or babysitting. Unless you have taken other steps, you are automatically carrying on as a sole trader.
To set up as a sole trader, you need to register for Self Assessment with Her Majesty's Revenue & Customs (HMRC).
Partnerships
A partnership will automatically arise when two or more people operate some enterprise with a common view of profit. These are sometimes called 'ordinary partnerships', 'general partnerships' or 'unincorporated partnerships'.
The Partnership Act 1890 governs partnerships. Unless there is an express agreement (written or oral) that containsthepartnership terms, the Partnership Act governs the partnershipterms . Therefore, you may want to come to an express agreement over the duties one partner owes the rest and vice versa.
Given that the legislation is over 130 years old, many implied terms are outdated and unusual. For example, if you want to remove a partner, you will need the consent of every partner in the partnership, including the one you want to remove.
Additionally, unincorporated partnerships cannot own assets in the partnership's name. Practically, any sort of asset like an office or piece of machinery you want to use to make a profit will be purchased in your partners' name and be held 'on trust' for the other partners.
Incorporated Business Structures
The key concept behind an incorporated business is that the business exists as 'separate legal person'. For example, this means that if you have an incorporated company, it can:
- enter into its own agreements;
- own assets;
- assume its own liabilities; and
- sue and be sued.
In most cases, those who own the company and those acting on behalf of the company will not assume liability for its debts, though they will share in its profits. This means that you are not generally personally liable for your business debts, unlike an unincorporated business.
The two incorporated businesses we will look at are:
- private limited companies; and
- limited liability partnerships.
Private Limited Companies
The ownership of a private limited company is split between its shareholders in the proportion of shares each shareholder owns. If you are currently a sole trader and incorporated a limited company, you will be the only shareholder unless you bring on other investors.
As a shareholder, liability in your company is limited to the value of your shares in the company. These shares are also known as equity. Hence, if the private company can no longer pay its debts, the shareholders are only ever liable for their equity in the company.
The disadvantage is that limited companies are highly regulated and require a good amount of paperwork to create and a lot of responsibility to maintain.
Limited Liability Partnerships
Like unincorporated partnerships, you must be in business with at least one other person to structure a business through limited liability partnership (LLP). These are flexible legal structures because you and your partners are free to decide the terms of the agreement, such as profit sharing and the duties you owe one another.
An LLP owns the assets of the business and is liable for its own debts. Likewise, members of the LLP act as its agents and only have liability up to the amount they have contributed or as otherwise agreed between the partners of the LLP.
Key Takeaways
The benefit of unincorporated structures is that they are flexible and do not entail many administrative obligations. The downside is thatthere is no limiting yourpersonal liability, and you may beliable for your business' debts. You can contrast unincorporated business structures with incorporated ones, like limited companies and limited liability partnerships. The liability of shareholders in a limited company is limited to the value of their shares, whilst the limit of a partner's liability in an LLP can be agreed between the partners. The downside with incorporated business structures is the administrative responsibilities and, in particular, the responsibilities that come with being a director of a limited liability company. What is best for you depends on the size of your business and your long-term plans.
If you need help with business law, such as incorporating a company, ourexperienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 258 4780 or visit our membership page.
Frequently Asked Questions
An incorporated business is where your business has a separate legal existence from you. That means it can own property, owe money, sue others, and other companies can sue it. The effect is that your liability for your company's debt is limited.
Which of the different business structures should I adopt?
Most people either trade as a sole trader, in a partnership, through a limited company, or through a limited liability partnership. Pick the one that suits your business and its goals best.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
